Nordic central banks and governments are close to signing an agreement with their Baltic counterparts that lays down rules to help contain the cross-regional fallout of banking crises, local media reports. Finance ministries, financial regulators and central banks will sign the accord in the coming weeks, according to the Estonian Finance Ministry.

“The agreement will spell out how countries in the two regions conduct stress tests, will require an exchange of financial information and list crisis-management procedures.”

Katrin Reimann

Nordic central banks and governments are close to signing an agreement with their Baltic counterparts that lays down rules to help contain the cross-regional fallout of banking crises, the Estonian Finance Ministry said Thursday.

“The agreement will spell out how countries in the two regions conduct stress tests, will require an exchange of financial information and list crisis-management procedures,” Finance Ministry spokeswoman Katrin Reimann said in response to questions. Finance ministries, financial regulators and central banks will sign the accord in “the coming weeks,” she said, according to balticbusinessnews.com.

The central bank of Sweden, whose lenders dominate in Latvia, Estonia and Lithuania, already has a law allowing it to provide loans to the Baltics to support monetary policy and the currency.

Broader agreements are needed as an “acute crisis” in the former Soviet region would be “detrimental to Sweden’s economic development,”Riksbank Governor Stefan Ingves said on Feb. 2.

Swedbank AB, SEB AB and Nordea Bank AB will book Baltic losses of $3.4 billion this year, the Riksbank estimates.

Ingves has also called for “stricter” cross-border regulation. Swedish banks’ total lending to the Baltic region stands at about 400 billion kronor ($55 billion), 80 percent of which is denominated in euros, the Riksbank estimates.

The former communist states rode a debt-fueled boom that started when they joined the European Union in 2004 and led emerging market expansion rates.

Latvia’s economy grew close to 12 percent in 2006, and by 2007 corporate bank lending grew as much as 50 percent, while retail lending rose as much as 70 percent, the Swedish central bank estimates.

Boom turned to bust when the financial crisis cut off access to credit and investors stuck to more liquid markets. Latvia’s second-biggest bank failed after a run on its deposits, forcing a state rescue that brought the economy to its knees.

Latvia in 2008 obtained a 7.5 billion-euro ($10.4 billion) bailout loan from a group led by the European Commission and the International Monetary Fund. Denmark, Finland, Norway and Sweden also contributed to the emergency loan.

Delinquent loans stemming from the Baltic economies remain the biggest threat to Swedish financial stability, the Riksbank, said in a Nov. 26 report.

East Europe’s banks, including those in the Baltic region, are “not yet out of the woods” and the outlook for the financial services industry in economies that will probably stay in recession this year remains “worrying,” Capital Economics said last month.

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